On Holding is already up 87% this year giving investors a solid return already. But could they get more out of ONON stock?
On Holding is the maker of On Running shoes originating in Switzerland with an innovative "cloud" technology.
According to IBD Stock Checkup, ONON stock ranked number 1 in its group. It holds a Composite Rating of 96, an EPS Rating of 81 and a Relative Strength Rating of 96. It was recently featured as an IBD Stock Of The Day at its latest buy point.
Investors that own the stock and think upside might be limited here could look at a covered call trade. The strategy provides some income to tack on to the total return of the stock.
ONON Stock: How The Covered Call Can Boost Returns
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on ONON stock might take shape.
Buying 100 shares of ONON stock cost around $5,040 at yesterday's close.
A 55-strike call option with an expiration on Jan. 17 traded around $3.55. That generates $355 in premium per contract.
Selling the call option generates an income of 7.58% in just under four months, equaling around 23.8% annualized. That's if the stock doesn't rise from here.
If ONON stock closes above 55 on the expiration date, the shares will be called away at 55. That leaves the trader with the $355 income plus gain on the shares themselves for a total profit of $814.
That equates to a 17.4% return, which is 54.7% on an annualized basis.
Evaluating Risks
Of course, the risk with the trade is that ONON stock might drop, which could wipe out any gains made from selling the call. But even with a loss on the shares, the income will help offset that to a degree.
Another risk is opportunity cost. If ONON stock rises substantially, the option premium may look paltry by comparison.
Still, covered calls are an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
Remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
